5 Tax Tips for Small Business Owners

It's tax time. Every year, people and companies work hard during this time to finish documenting last year's transactions and get ready to file taxes. Accountants and tax preparers are especially busy. Nearly 60 percent of their business is typically derived this busy season. But, if you are a small business owner, you should be thinking about taxes all year long.

A critical element of business risk management is taking care of tax liabilities. And, while income taxes might be the most significant tax that a small business or small-business owner pays, there are a myriad of others.

There's property tax, sales tax, and, if you have employees, payroll tax. Plus, depending on where you live and the type of business in which you're involved, there could be even more taxes. Many small companies pay hundreds of thousands of dollars each year in taxes, making it a costly line item. Plus, the penalties for late or non-payment are high.

Keeping all that in mind, here are five best practices for your small business where taxes are concerned:

1. Make Tax Payment a Top Priority

Let's be blunt, having the government as a creditor is not where you want to be. If your business is ever at a point in which you need to prioritize who to pay, tax payments are at the top of the list. Often, a cash shortage doesn't mean that a business isn't profitable. It may indicate that some customers have been paying slowly.

But, unlike you who can often just keep asking for payment from a slow-paying customer (and then consider better arrangements for next time), the government can shut you down if you don't pay them. So, paying taxes first is a best practice. Of course, keep up good communication with other creditors and pay as promptly as possible. But few creditors wield the power that the government does.

2. But, Understand That Some Taxes are Higher Priority Than Others

Staying current with all tax payments is essential, but some are more vital than others. Understanding that sales tax and certain payroll taxes involve you and your business acting as a fiduciary of others' funds is crucial.

For sales tax, you may have charged your customers the tax, but they were the ones who paid it. And, it's owed to the state or local government. You just hold it until it's due. Same with payroll withholdings. Your employees owe the tax, but you withheld it from their paychecks. You have a responsibility to turn it over to whichever government authority to which it's owed.

If you instead spend that money and don't turn it over when due, you've breached a significant fiduciary responsibility. This breach can cause a government to act swiftly and harshly, often closing a business with little notice. This can then make it very hard for an establishment to ever recover. After all, closed doors can equal no business and no cash flow. Understanding tax priority is vital.

3. Keep Tax Dollars in a Separate Account

Jane and her husband, Tim, decided to open a new business. Friends had encouraged them that their custom-made coffee mugs with the "never go cold" feature was going to be a hit. So, they decided to go for it.

They're accountant gave them a tip to stick to, even when they got bigger. Periodically, but no less than once a week, move the sales tax collected to a separate account. Get it out of the operating account. That way, they'd be less apt to inadvertently use the money. They'd also be giving the funds the respect they deserve. The money wasn't theirs, so keep it separate and pay it over as soon as possible. Take any possible urge to use the money away.

Now, even years later, when Jane and Tim's business is thriving (yes, the "never go cold" feature was a hit) and they no longer have to worry about the temptation to use sales tax collected for a different use, they still use the same best practice. Once a week, they transfer the sales tax collected to a separate account. And, when the tax is due, they pay it promptly. Then, they sit back and sip on a nice hot, "never go cold" mug of their favorite coffee, knowing their best practice for sales tax really works.

4. Understand Your Responsibilities for Different Types of Taxes

It's important to understand that there are numerous different tax types out there. And, as a small-business owner, it's your responsibility to know those for which you're liable. It can be a confusing and difficult task. However, it's necessary.

The financial burden on a business for taxes can already be high. But, if it's discovered that a particular tax has been required but not paid, the price can be enormous and devastating. An otherwise thriving new business can be cut off at its knees by an unpaid and previously unknown tax liability. Make it a top priority and best practice to understand your different tax responsibilities.

5. Get Help When Needed

There are different ways to stay aware of the taxes that might be out there. These days, federal, state, and local government have things like websites and email blasts to keep taxpayers informed. Local chambers of commerce and other business groups often provide tax information to their members.

Trade associations are another excellent resource. Talking to others in your industry can provide insight. And, of course, your accountant or tax preparer makes it their job to stay up on taxes and how they impact you, their client.

Conclusion

As a small business owner, taxes are a risk. And, the higher the risk, the more attention they deserve. So, don't just think of taxes during "tax time." Think about them all year long. Implement best practices around them, including knowing which ones are due, always paying them and always on time. Then, sit back and enjoy a nice hot, "never go cold" mug of your favorite coffee. Or, is it tea?

Kimberly has over 20 years of experience in accounting and finance. Before forming Kansas Money Coach LLC, Kimberly worked as a managing director with Grant Thornton LLP, and prior to that, Kennedy and Coe LLC (now, KCoe Isom LLP). She works with various companies as a writer on finance topics, teaches financial education, provides one-on-one coaching, plus tax consulting and compliance services to individuals and small businesses.

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